The Net Present Value (NPV) Method and the Internal Rate

question 136

Multiple Choice

The net present value (NPV) method and the internal rate of return (IRR) method are used to analyze proposed capital expenditures. The IRR method, as contrasted with the NPV method:

• A) Is considered inferior because it fails to calculate compounded rates of return.
• B) Incorporates the time value of money, while the NPV method does not.
• C) Almost always gives a different decision that the NPV method as to the acceptability ("go" versus "no go") of a given proposed investment.
• D) Assumes (according to some commentators) that the rate of return on the reinvestment of the cash proceeds is at the indicated rate of return of the project analyzed rather than at the discount rate used.
• E) Is preferred in practice because it can handle multiple desired rates of return, which is impossible to do with the NPV method.

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Definitions:

Market Movements

The collective shifts and trends observed in the pricing and valuation of securities within financial markets.

Earnings Potential

The maximum amount of money an individual or entity can expect to earn from their investments or job over a specific period.

Systematic Risk

The risk inherent to the entire market or market segment, also known as non-diversifiable risk or market risk.

Slope

In linear regression, the slope indicates the steepness and direction of the relationship between two variables, representing the amount of change in the dependent variable for a one-unit change in the independent variable.